Reform of late payments and likely impact on the UK construction industry

Cash flow pressures and late payment practices remain a persistent challenge in the construction industry, and further reform is now firmly on the agenda.

Last month, our team wrote a piece looking at the UK Government’s proposal to ban retention payments in construction contracts.

Here, we take a look at the other measures being proposed as part of the UK Government’s crack down on late payments following its response on the late payments consultation and how these are likely to affect the construction industry.

These measures are likely to be felt across the UK – whilst late payments is a devolved matter for the Scottish Government, it is collaborating with the UK Government under the Late Payment Common Framework to reform and align payment practices and new legislation will be introduced to deal with these changes.

Key proposals

Under the proposals published in March, the UK Government plans to give the Small Business Commissioner (“SBC”) powers to:

•  investigate businesses suspected of poor payment practices or inaccurately reporting payment performance;
• settle payment disputes outside of the court process, which will include powers to allow small businesses to refer a payment dispute with a larger business to the SBC for adjudication awards; and
•  fine businesses, including significant potential fines for large companies that persistently settle invoices late or fail to comply with late payment legislation.

There will also be wider measures that can be taken to crack down on late payments:

• boards or audit committees of any persistently late-paying large companies will be required to justify why payment performance is poor and set out what procedures they propose to introduce to rectify this;
•  maximum payment terms of 60 days with limited exemptions, with the aim of ensuring that smaller businesses are paid in a maximum of 60 days;
• there will be a statutory cut-off period within which disputes must be made and where businesses do not raise disputes within the time limit, they will need to pay compensation to their supplier; and
• it will be a requirement that all commercial contracts contain a right to statutory interest at eight per cent above the Bank of England base rate and if this is interest is not paid, small businesses will be able to escalate this to the SBC and resolve the issue through adjudication.

Impact on the construction industry

Whilst these proposals have yet to be translated into concrete measures, their potential scope and operation raise significant questions for the construction sector, where cash flow and tight margins have long been an issue. The devil will very much be in the detail as we do not yet know how the measures will interact with the industry.

Currently, parties to a construction contract have a degree of freedom when agreeing payment terms for their contracts, provided they comply with the Housing Grants, Construction and Regeneration Act 1996 (the “1996 Act”) requirements to have an “adequate mechanism for determining what payments become due under the contract, and when” and to provide for a final date for payment, the period for which parties are free to agree. The UK Government recognises that the proposed stricter payment period will require alignment with the existing 1996 Act framework, the detail of which is awaited. 

Those in the construction industry will be also keen to know what contracts will be exempted from these payment rules, as what constitutes “smaller” and “larger” businesses is still to be defined.

The UK Government has indicated that the statutory cut-off period for disputing invoices will not apply to construction contracts and that a separate measure, aligned with the existing payment notice mechanisms under the 1996 Act, will be taken forward for construction contracts. It remains to be seen exactly how this will look.

It is also not clear how the powers of the SBC to adjudicate payment disputes will interact with the adjudication provisions under section 108 of the 1996 Act.

What should you do now to prepare?

Whilst it is clear that further detail is required from the UK Government as to how the measures will be developed and how construction contracts will be impacted, there are steps that construction businesses can take now to prepare based on the information we have.

It is advisable for businesses to review their contracts now and their payment processes in anticipation of these potential reforms. This will include:

•  identifying any contracts which have payment terms longer than 60 days and for those which do, whether they are contracts which will likely fall into one of the exceptions;
• considering supply chain impactions of the 60-day payment terms and whether there may be different regimes appliable to different contracts (i.e. some where exemptions apply and others where they do not);
•  identifying any contracts which have any bespoke interest rates – this will include any which follow various standard forms including JCT/SBCC and NEC;
• updating your precedents and keeping the planned changes in mind for future contracting; and
• identifying retention use and considering alternative performance security options in the event that the retention ban proceeds (noting qualifying entities will already be reporting on payment practices and policies in respect of retention in qualifying construction contracts, per The Reporting on Payment Practices and Performance (Amendment) Regulations 2025 – read more here.

Businesses should also have awareness at both board and operational level of the proposed measures and what they may mean for their reporting and contract administration practices.

If you would like to discuss anything raised in this article, please get in touch with Gwen Napier or David Sharkey, or your usual Burness Paull contact. 

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